How Big The AI Boost For Harvey Norman?

This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: HVN

Harvey Norman’s FY24 sales performance was disappointing when compared to peers. But as cost of living pressures ease, the retailer is placing great faith in the AI revolution.

-Harvey Norman saw sales decline in FY24
-FY25 looking more positive
-Offshore exposures offer mixed blessings
-AI to drive a consumer upgrade cycle

By Greg Peel

Gerry Harvey is not happy. The Harvey Norman ((HVN)) executive chairman told the Fairfax press the company he co-founded may cease to exist given the climbing costs associated with continuous disclosure obligations required of an ASX-listed company. It would instead be privatised or owned by private equity.

But fear not, the timeframe he suggested is ten to twenty years.

The outburst came as Harvey Norman reported a -0.3% fall in sales in the second half of FY24, compared to 1.3% growth for JB Hi-Fi Australia ((JBH)), 1.5% for stablemate The Good Guys and -1.2% for Nick Scali ((NCK)).

The differences do not appear stark during a cost of living crisis, but Ord Minnett points out Harvey Norman’s FY24 profitability represented 6% growth compared to pre-covid, while JBH Hi-Fi Australia’s profit has increased by 59%, The Good Guys’ by 109%, and Nicke Scali’s by 53% over the same period.

Harvey Norman’s underlying profit fell -20% year on year in FY24. This was a slight beat to consensus forecasts, but a -37% fall in lease depreciation & amortisation (D&A) provided a $27m tailwind, undermining the quality of the result.

That said, one “high quality” aspect was 100% cash conversion.

Signs of Improvement

Franchisee sales were down -5.6% in the year, but net of a -9.7% fall in the first half and only -0.6% in the second. The month of July (FY25) saw 3.3% sales growth.

New Zealand remains a laggard. Retail sales in NZ fell -9.0% in the second half and -9.5% in July as rival JB Hi-Fi accelerates its rollout.

In Australia at least, management suggested “We are strategically positioned to capitalise on improvements in retail trading conditions”.

So what will improve? 

Well, we had the tax cuts, Macquarie points out, and energy rebates. Unemployment is low, wages are growing as inflation is falling and interest rates appear to have at least peaked, ahead of expected cuts some time in 2025.

Things that go Boom

Management pointed to steady sales in electronics, computers and mobiles in the second half, but was particularly excited about growth in this category into FY25. Management was “very animated”, Macquarie reports, when discussing the opportunities provided by AI.

Covid lockdowns brought the advent of work-from-home and the need to upgrade to newer computer/device technology. For many, WFH continues, or some hybrid model, but the rise of AI promises to drive a whole new boom in technology upgrades.

And it’s not just about computers. AI technology is also set to revolutionise the humble fridge and washing machine. The possibilities are endless.

Not that Harvey Norman will have a monopoly on AI-driven devices. It is Harvey Norman’s “significant sales underperformance”, as Ord Minnett puts it, to peers in Australia that has some brokers underwhelmed about the retailer’s prospects.

There’s also the issue of Harvey Normans’ presence outside Australia and New Zealand.

Management cited the need for capital for the UK expansion, along with the three months remaining on its earlier announced buyback as reasons for the lack of a special dividend. The first UK store is set to open in October.

Malaysia remains on track for 80 stores by 2028, while the EU is mixed, and plans to roll out in Hungary have ceased.

Undecided

Jarden believes we are at the bottom of the cycle for Harvey Norman and historically the retailer has shown significant operating leverage on the way out, led by Australia. The broker sees the retailer facing tailwinds via the replacement cycle, market share and older demographic skew.

Against this backdrop, and with the international rollout on track (with the exception of the EU), Jarden sees earnings risk starting to skew on the upside for FY25. In addition, the balance sheet is in a strong position backed by property worth around $3.25 a share, with scope to accelerate capital management, albeit not in the near term.

Jarden is more positive on Harvey Norman and those retailers with global versus local exposure, such as Breville Group ((BRG)).

But until positive signs become more evident, Jarden sticks with a Neutral rating.

While the consumer environment is improving into the first half FY25, and expectations that a higher level of innovation will benefit the consumer electronics category, Goldman Sachs remains concerned that Harvey Norman’s comparable sales remain below key peers including JB Hi-Fi and Officeworks ((WES)).

Continued weakness in New Zealand as well as volatilities in Asia also add dilution and risk to growth, Goldman suggests, while retaining a Neutral rating.

Similarly, Ord Minnett maintains Hold, citing Harvey Norman’s significant sales underperformance compared to peers in Australia, and an unproven international expansion strategy, as making it difficult to recommend the shares.

Macquarie is more upbeat, believing discretionary retailers are well-placed over FY25, and looks to the rollout of AI laptops as a catalyst for growth over the coming year, along with tailwinds provided by aforementioned tax cuts and anticipated interest rate cuts.

Macquarie retains an Outperform rating.

Citi believes the focus of the result will be on turnaround in franchise sales momentum into July. This broker expects this has potential to drive significant margin improvement into FY25 given the significant operating leverage in the Harvey Norman franchise model, evidenced by a Buy rating.

UBS also maintains Buy. Morgan Stanley, often the naysayer, retains an Underweight rating.

That leaves three Buy or equivalent, one Hold and one Sell among brokers monitored daily by FNArena. A consensus price target of $4.92 is spread between Morgan Stanley on $4.20 and Citi and UBS both on $5.50.

Not monitored daily, Goldman Sachs has a target of $4.50. Jarden’s target is $4.60.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArenais proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms